Impact of Working Capital Management on Profitability in Engineering Sector;An Appraisal of Listed Pakistani Firms

Abstract

Abstract:

Engineering industry forms the base for the development of the nations. In fact, it is a symbol of self-reliance and crucial industry for a long-term economic development of the country. Pakistan’s engineering sector has a minor share in international trade of engineering goods. In fact, Pakistan consumes major share of its foreign reserves on the import of machines and capital goods. Along with other problems, the operational efficiency in managing working capital deems great importance in corporate strategy. The managerial decisions concerning investment in current assets have a significant impact on the firm’s profitability particularly of manufacturing and processing sector. The present study provides empirical evidence about the impact of working capital management on the profitability of a sample of engineering firms listed at Karachi stock exchange for the period 1996-2008. The impact of Number of Days Receivables, Number of Days Inventory, Number of Days Payable, Cash conversion cycle and Current ratio on Return on Asset as a measure of firm’s profitability has been analyzed under the Pearson’s Correlation model and fixed effect model. The findings show that that there is a strong negative relationship between NDI, NDR, NDP, CR and ROA. However, unexpectedly, the cash conversion cycle has a positive impact on return on asset, which is inconsistent with the previous studies on this topic. The findings also revealed that size of the firm used as control variable has significant positive impact on firm’s profitability.